Preparing Effective Management Information for Board Reports

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1 Not for Profit How to Guides Preparing Effective Management Information for Board Reports MHA MacIntyre Hudson How to Guides are designed to provide practical assistance with meeting legal or regulatory obligations, aid operational effectiveness, or improve management/ governance processes. They often include models, pro-formas or templates that can easily be adopted by organisations. The Guides address a wide range of areas from major strategic methodologies and policies to operational processes where advice on good practice is needed. Accordingly they vary in length and format. All have the key characteristic of being practical not theoretical, and based on our team s decades of real-life experience working both with and within a very wide range of not for profit organisations. Legal/Regulatory Background The most successful charities are those that can demonstrate the most effective and competent management and governance processes. Management information systems assist the provision of information to support decision making at all levels within an organisation. Board reporting is just one aspect of such a system but is critical to the success of an organisation Most boards are aware of the statutory compliance reporting that charities are required to undertake, such as annual financial statements and the Charity Commission Annual Return, however there is no prescribed list of other management information that they should receive. There is, however, considerable guidance on the principles of good practice and what contributes to strong leadership. The Charity Commission s publication CC10, The Hallmarks of an Effective Charity was one of the first attempts to codify the elements that contribute to good charity governance. Hallmark 4 states that An effective charity is always seeking to improve its performance and efficiency, and to learn new and better ways of delivering its purposes. The Good Governance Code for the Voluntary and Community Sector states in Principle 2 that An effective board will provide good governance and leadership by ensuring delivery of organisational purpose, and to do this the charity will have systems in place to measure outcomes, assess impact and enable the board to ensure the organisation delivers its purpose. More recently the Charity Commission s Big Board Talk guidance sets out the 15 essential questions that trustees should ask, and of these there are 12 questions regarding finance and 3 that relate to effectiveness. However none of these publications specifically addresses the nature and content of management information suitable to be reported to trustee boards, hence this Guide seeks to provide some practical guidance. Although this guide focuses on processes that are most relevant to medium sized or large charities, the essential principles apply to charities of every size. 1

2 Detailed guidance The world has changed The operating environment for charities is very challenging and seldom has there been such uncertainty. Charities must face the triple challenges of funding austerity associated with continued public sector funding cuts, the greater desire of stakeholders to understand the difference that the charity has made to its beneficiaries, and increasingly active regulation by the Charity Commission. Boards need to be confident that their decisions are based on reliable management information in order to respond to realign their charities as necessary. The traditional management information pack comprises financial accounts, a comparison with budget, a revised forecast for the year, some narrative and occasionally there is fund accounting analysis so the application of restricted funds can be monitored. This is no longer sufficient, even for the smallest of charities. But some organisations are not yet achieving even this basic level. Finance is not enough Financial reporting is essential to ensure charities are adopting good financial management and appropriate stewardship of resources. But given that the raison d être of charities is to deliver charitable benefits it must be the case that an essential aspect of board reporting is charitable performance. In order to imbed risk management into on-going processes it is helpful for reporting to include a way of reporting, monitoring and acting on changes to strategic risks, both financial and non-financial. Governance reporting not management reporting Much is debated about the balance between governance and management, and this is an important factor in board reporting. Putting it very simply -management need information to manage, and trustees need information to govern. Whilst there will be an overlap in respective functions, ultimately the decision needs of each group are different. Yet, so often management and trustees receive exactly the same information. For example, whilst an honorary treasurer or a Finance Committee as well as the management team may wish to see the detailed monthly management accounts, mostly a brief summary of the salient points will be appropriate for the full board except where significant concerns exist. Frustrated senior executives are critical of their boards when they seem to interfere in day-today management matters even though they have prepared board papers that encourage this to happen and do not clearly set out what strategic decisions are required by the board. Trustees complain that they don t understand if the charity s vision is being Traditional financial reporting has been focused on financial performance. However, even in the commercial, profit motive world, where the financial bottom line is the ultimate goal, this is now seen as not being sufficient. Integrated reporting, that takes account of the impact of the organisation in environmental, social and governance terms, is now the benchmark. Charities may be content to just report charitable performance on an annual basis by preparing an impact report, outcomes assessment or Social Return on Investment calculation. However, it is much better to have periodic measurement done throughout the year with the acceptance that these metrics will have limitations. So whether it is using bespoke key performance measures, a balanced scorecard, PQASSO, or some other performance measure, boards should receive some form of charitable performance reporting. 2

3 achieved but have not asked management to report on strategic performance measures. The key is to mutually agree what each needs in order to ensure board reporting is appropriate. What is appropriate? Virtually every charity is different so what is appropriate board reporting in one charity will be unsuitable in another. For example the well-known maxim that cash is king is in most cases entirely correct, hence a detailed cashflow forecast should be included in the monthly management accounts. However, there are charities that, for example, receive all their funding in advance or have significant reserves in expendable endowment, where cash is not a key factor, and where expenditure or future commitments are much more important. So rather than identifying a checklist of content for a board report, set out below are key principles to consider when deciding how to report to your board. 1. Insightful and informed decision making Many boards are now requiring management to report in a way that really focuses on the areas that are making the most difference to their beneficiaries, perhaps using a performance dashboard format to concentrate on the highest level matters, but with an ability to drill down to constituent elements where needed. goats. This is unfair and does not help the board to individually and corporately fulfil its responsibilities. So start at the lowest common denominator, and seek to present the information in a way that is understandable and accessible to all trustees. For example a visual or graphical presentation of financial results and forecasts can be empowering to trustees that are not finance professionals. Also consider practical difficulties it is embarrassing if trustees turn up with a magnifying glass because the figures in the management accounts are so small or illegible! If papers are ed consider sending a pdf file rather than a spreadsheet. Rebalancing your board reporting Some charities will decide that their board reporting does need revising. It is important to recognise though that there will be imperfection in whatever you do and there will always be a need to apply a balanced approach to the competing demands of any effective management information system. So, set out below are seven factors that will help you get your board reporting into balance: 1. Timeliness versus precision Most organisations set internal service level agreements for the timescale after a period end when management information is prepared. There is a risk that the pursuit of accuracy may inappropriately delay the timing of release of information to 2. Actionable Most know that board papers sent out for a meeting should be accompanied by a covering sheet setting out the board action that is needed. Beware the statement that the paper is for information. If this is the case why send this with papers for a meeting much better to send the information separately as soon as it is available so trustees can consider it when they wish. Keep board papers exclusively for matters where a board action is required for example for board decision or to note and approve. 3. Understandable A balanced board will comprise individuals with a variety of skills and inevitably there will be strengths and weakness. Finance is an area that will often divide a board into the sheep and the 3

4 4. Financial versus non-financial Chief Finance Officers in charities generally feel at home when reporting in financial terms to their boards, and as noted above this is essential at all times. But there is so much more that could be reported that will illuminate board decision making. Accountants have highly desirable areas of competency in analysis, understanding resource allocation, and evidence based planning. Often it is the CFO who leads or advises on the development of charity performance measures and is the best placed to oversee the reporting to the board of such matters. the board. If you are about to drive off a cliff it does not really matter if you travelling at 68mph or 70mph, either way the sooner the brakes are applied the better. Also bear in mind how much highly valuable management time is spent preparing board papers, which sometime are only given a cursory glance at the board meeting. Consider the approach whereby for ever report that is added there is also one that is taken away. 2. Detail versus overview The larger and more complex the organisation the more care is needed to ensure that trustees are not swamped with information. The danger is they cannot see the wood for the trees of paper that land on their doormats days before the next board meeting. Is information on all areas needed each time the board meets or are there some that don t need to be considered each time? If so get the board to consider in advance each year what should be on its agenda at each of its meetings. 3. Historic versus future Much board reporting is historic what the result have been, what has been achieved. This is important but too often it is at the detriment of giving the board the information it needs to help guide the organisation to its future goals. Likewise providing historic trends of performance over say the last 3 or 5 year may provide the board with the insight they need to determine the charity s future and the strategic decisions that need to be made. There are charities that have not been aware of the incremental weakening of their position over recent years. A long term trend analysis would have shown them that without a change of strategy they were on an inevitable slide toward the abyss. 5. Trust versus monitoring All good relationships depend on a strong level of trust on both sides. Whilst trustees might have ultimate responsibility for a charity s failings, this does not mean they should closely monitor and follow up every area of concern. Where a strong professional management team exists, boards should have a high level of trust in the management standards in existence - perhaps setting a clear level of materiality for matters that need to be brought to board attention. The old adage that delegation is not abdication does apply, and boards should consider what level of scrutiny is required. For example, if you do not have an internal audit function an occasional random check of bank reconciliations by a trustee provides the board with assurance that key financial controls are operating properly. 6. Short term versus long term There is so much to encourage us to think in annual cycles and this is reflected in organisational planning and board reporting. Most prepare and monitor themselves against annual budgets looking ahead just 12 months. Yet the strategic role of the board means that they must look further forward than this. An outline three year business plan to accompany the annual budget is now becoming more common and is good practice. Not least because trustees have a responsibility, especially as company directors, to be sure about the going concern status of their charity. Whilst this might be defined as being able to pay your debts as they arise for the next 12 months, it would particularly reckless if it had not been spotted that key funding runs out or a major liability crystallises in month 14. 4

5 7. Cost versus value No single size fits all, and there is a real financial cost in preparing comprehensive and regular management information. An agreed judgement will need to be made concerning the important of the information to the success of the organisation. There are some charities where their effectiveness will not be affected by the absence of certain management information. So it is essential to assess the risks of both inadequate and excessive information on the strategy and operation of the charity. This article is designed for information purposes only. Whilst every effort has been made to provide accurate and up to date information, it is recommended that you consult us before taking or refraining from taking action based on matters discussed. not-profit Conclusion Those charities that make the most difference to their beneficiaries are often those that have the most effective and competent governance and management. Ensuring board reports provide the appropriate information for decision making is an essential element of this good practice. Further advice/guidance For further guidance on this topic please refer to CC10 The Hallmarks of an Effective Charity, the-hallmarks-of-an-effective-charity-cc10, The Good Governance Code, governancecode.org/, and the Charity Commission s Big Board Talk questions, If you would like to discuss any matter arising from this please contact Sudhir Singh (sudhir.singh@ mhllp.co.uk) or your usual MHA MacIntyre Hudson contact. Sudhir Singh Partner MHA MacIntyre Hudson June 2015 MHA MacIntyre Hudson is the trading name of MacIntyre Hudson LLP, a limited liability partnership, registered in England with registered number OC A list of partners names is open for inspection at its registered office, 201 Silbury Boulevard,Milton Keynes MK9 1LZ. Registered to carry on audit work in the United Kingdom and regulated for a range of investment business activities by the Institute of Chartered Accountancy in England and Wales. An independent member of MHA,a national association of UK accountancy firms. The term partner of partners indicates that the person (or persons) in question is (or are) a member(s) of MacIntyre Hudson LLP or an employee or consultant of its affiliated businesses with equivalent standing and qualifications. Partnersand directors acting as administratorsr administrative receivers contract as agents and without personal liability. Further information and links to the respective regulators and appointed individuals qualifications can be found via our website MHA MacIntyre Hudson is an independent member of Baker Tilly International. Baker Tilly International Limited is an English company. Baker Tilly International provides no professional services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. Baker Tilly UK Group LLP is the owner of the Baker Tilly trademark. MHA MacIntyre Hudson is not Baker Tilly International s agent and does not have the authority to bind Baker Tilly International or act on Baker Tilly International s behalf. Nonof Baker Tilly International,MHA MacIntyre Hudson, nor any of the other member firms of Baker Tilly International has any liability for each other s acts or omissions.